The Fed will raise rates at its meeting today. What to expect next.

Text size

The Federal Reserve’s efforts to tame runaway inflation appear to be working, but there is still a long way to go.

Investors rejoiced on Tuesday, pushing stocks higher after the release of the fifth consecutive monthly reading of consumer inflation that showed easing price gains. Expect Fed Chairman Jerome Powell to temper market enthusiasm, however, when he speaks Wednesday following the conclusion of the Federal Open Market Committee’s two-day policy-making meeting.

The FOMC will release its latest interest rate decision at 2 PM ET. In a press conference scheduled for 2.30pm, Powell will likely stress that the central bank’s fight against inflation is far from over and that monetary tightening will continue. Key to watch: Fed officials’ predictions for future interest rate hikes.

The Fed is expected to raise its federal funds rate target by 0.50 percentage point on Wednesday, to a range of 4.25% to 4.50%, following four consecutive 0.75 percentage point hikes.

The central bank will also release its latest dot plot of economic and interest rate forecasts from FOMC members. The September dot plot showed a median federal funds rate of just under 5% next year. Following Tuesday’s cooler-than-expected inflation print, futures prices moved to imply a peak rate further below that level around the middle of next year, after recently moving slightly below above 5%. Any move in the points, by consensus or otherwise, should be the main driver of market reaction on Wednesday.

Inflation appears to have peaked in June with a 9.1% annual increase in the government’s consumer price index, or CPI. Tuesday’s CPI report from the Labor Department showed a seasonally adjusted increase of 0.1% in November, versus the consensus forecast for a 0.3% increase. The CPI rose 7.1% year over year, versus a 7.7% increase through October.

November’s increase was the smallest annual change since December 2021, although inflation remains uncomfortably high. The Fed has a target inflation rate of 2% annually, consistent with a 0.17% monthly increase. Based on November’s reading, it would take just another six months of similar monthly readings to bring the annual figure below 2%, as the much higher year-ago CPI prints decline.

This is far from a done deal, though: commodity and goods inflation are down, but other stickier components of the CPI are still rising rapidly.

“Importantly, today’s results were driven by a precipitous decline in goods inflation from 5.1% to 3.7%, a result of earlier distortions due to the pandemic and supply chain challenges,” he wrote. Tuesday Jonathan Golub, Chief US Equity Strategist at Credit Suisse. . “While today’s revelers are focused on better-than-expected headlines and top readings, features remained sticky/unchanged at 6.4%. Unfortunately, services and high wages will make it harder for the Fed to change direction than many investors are discounting.

The FOMC’s next rate decision will be released on February 1, following the release of another month of inflation and jobs data. Fed officials have promised a “higher for longer” policy environment, with the federal funds rate peaking at around 5% in the first half of next year and stabilizing near that level for a while. time.

If inflation continues to fall and the labor market shows signs of weakness, not just a slowdown in hiring, the outlook could weaken. But on Wednesday, Powell will continue to speak tough, even as he acknowledges recent progress.

“With this encouraging second CPI in hand, we think he will have a hard time justifying the inflation chase (and the broader environment) with the same over-the-top hawkish approach he took last time,” RBC Capital Markets wrote on US chief economist Tom Porcelli on Tuesday. “Job growth and inflation are slowing down.”

There may be more dissent within the ranks of the FOMC, however, over the future course of policy. That may be evident in this year fourth and final summary of economic projections, out Wednesday. The dot plot shows the estimates of the 19 FOMC members for economic growth, unemployment, inflation and interest rates over the next few years.

Email Nicholas Jasinski at nicholas.jasinski@barrons.com